What is the “Foreign Exchange,”
or “Forex” or “FX” for short? This is the largest financial market in the world. Its daily average
turnover is approximately US$1.5 trillion. Foreign Exchange trading
simply means the simultaneous buying of one currency, and selling
of another. The world's currencies are on a floating exchange
rate. They are always traded in pairs – for example, Dollar/Yen,
Euro/Dollar, etc.
Is there a “central location”
for this market? No. Unlike stock and futures markets,
FX trading is not centralized on any one exchange. It is considered
to be an Over-the-Counter (OTC), or 'Inter-bank,' market. This
is because transactions are conducted between two counterparts
over the telephone, or via an electronic network.
Who are the “participants”
in this market? 'Inter-bank market' means that it
was dominated by banks up until recently – i.e., central
banks, commercial banks, investment banks, etc. However, thanks
to market makers brokers, other market players then entered the
market in record numbers. They include international money brokers,
large multinational corporations, registered dealers, global money
managers, private speculators, and futures and options traders.
When is this “market open”
for trading? This is a true seamless 24-hour, seven-day-a-week,
market. Trading begins each day in Sydney, and then moves around
the world, as each financial center opens up – Tokyo, London,
and then New York – in that order. The big advantage to
trading the forex market is that traders like you and I can respond
to currency fluctuations caused by economic, political or social
events as they unfold – day or night. This is much unlike
other financial markets, as you well know.
Which “currencies” should
I trade in this market? The most commonly traded
are those that are 'liquid' – i.e., those of countries with
stable governments, low inflation, and respected central banks.
Over 85% of all trading activity revolves around the major currencies
– i.e., the Australian Dollar, British Pound, Canadian Dollar,
Euro, Japanese Yen, Swiss Franc, and the U.S. Dollar
Do I need a lot of “money”
to trade this market? No. One market maker broker
we know of requires a minimum deposit of $500, although it is
preferable that you start with at least US$2,000 to US$5,000 in
your trading account. You can execute margin trades with up to
200:1 leverage, and you can also execute trades of $10,000 with
an initial margin requirement of $50, in some cases.
However, it is important to note that, while such leverage allows
you to maximize your profit potential, the potential for loss
exists too. A more pragmatic margin trade for you, if you are
new to the FX markets, might be in the order of 20:1, but this
ultimately depends on your appetite for risk. The most common
ratio is 100:1 for a standard account, and that’s what we
recommend when you open your account. Of course, you can start
with a mini account, and upgrade from there.
Concerning risk, our trading method has a 70% success rate, so
you will not be “flying blind,” as most traders do.
We are here to help you get on the winning side of most of your
trades with our revolutionary Pivots Program that has captured
the Forex market by storm.
Don’t forget that you can open a demo account with most
market maker brokers that we deal with. This requires no capital
outlay, and is risk-free.
We would be more than glad to recommend a market maker broker
to you that would suit your needs. We have thoroughly researched
the offerings that are available out there, and have come up with
those that we are prepared to suggest you use.
What is “margin?” Margin
is just that – collateral for a position. Your market maker
broker will request additional funds by way of a "margin
call," if the market moves against your position. It will
immediately close out your open positions, if there are insufficient
funds in your account.
What are “long” or “short”
positions? A long position is one in which you buy
a currency at one price, with the expectation of selling it later
on at a higher price. Obviously, you anticipate that the market
will rise. A short position is one in which you sell a currency
with the expectation of buying it back at a lower price. Here,
you expect the market to fall. Every FX position you take automatically
entails going long in one currency, and short the other. If you
buy one, by default you are shorting the other.
What is the difference between “intraday”
and “overnight” positions? Intraday
positions are those positions you would take during the 24-hour
period, after the market maker broker’s normal trading hours
open, but not hold after the close. Overnight positions are those
of your positions that are still on at the end of normal trading
hours. Your market maker broker rolls over your positions at competitive
rates (based on the currencies’ interest rate differentials)
to the next day's price.
What “drives” currency
prices? Currency prices are affected by a variety
of economic and political conditions – most importantly
inflation, interest rates, large market orders, and political
climate. Furthermore, governments sometimes enter the Forex market
to influence the value of their currencies, either by flooding
the market with their domestic currency to lower its price, or
conversely by buying it to give it a boost. This is commonly called
“central bank intervention.” Any of these factors
can cause volatile currency prices. However, the sheer size and
volume of the Forex market makes it virtually impossible for any
one entity to "influence" the market for any length
of time.
How should I “manage risk?”
The most common risk management tools in Forex trading
are the limit and stop loss orders. A limit order restricts the
maximum price to be paid, or the minimum price to be received.
A stop loss order ensures that your position is automatically
liquidated at a predetermined price, should the market move against
you. Limit order and stop loss orders can easily be executed due
to the huge liquidity of the Forex market.
What “trading strategy” should I use?
You could identify good trading opportunities, and execute your
trades based on economic fundamentals and/or technical factors.
These factors typically include charts, mathematical analyses,
support and resistance levels, and trend lines, but we have our
own view on these technical considerations, as you will see in
a minute.
Fundamentalists anticipate price movements by analyzing and interpreting
a wide variety of economic information, including government-issued
indicators, news, rumors, and reports. However, unexpected events
instigate the most dramatic price movements. Such events can include
a central bank raising domestic interest rates, the outcome of
a political election, or even an act of war. Nonetheless, it is
usually the expectation of the event that drives the market, rather
than the event itself.
From a purely technical perspective, there are many approaches
to identifying buy/sell levels for a tradable, but a great number
of them are unreliable. Those approaches include methodologies
that utilize Fibonacci numbers and ratios, Gann concepts, moving
averages, and trend lines. They all have a very static view of
the tradable. They assume that the market will repeat past behavior
and experience, and can therefore be viewed linearly. They also
use fixed intervals for inputs, which creates yet another dilemma.
The old maxim: “A study of the past does not tell you anything
about the future.” The exception here is our interest in
the previous week’s levels, and those of the trading session
just past.
Watching price action without having something to go by will
leave you directionless. You should watch prices in relation to
points-of-reference (a pivot point in combination with buy/sell
levels). It is perhaps the only way of knowing whether the market
is moving closer to, or further away, from a particular point.
It also helps you develop a feel for the market, once you put
your position on. Your entry price will take on a whole new meaning,
as you track it in relation to these points-of-reference.
When watching price action, you will want to know three things:
in what direction, how far, and how fast. To do this measurement,
you will need only observe current price in relation to what we
call the pivot point.
Our Pivots Program generates all the buy/sell signals for you
automatically. All you have to do is pull the trigger, and relax,
when you combine these entry/exit points with other indications,
like significant bars (key reversal bars, inside bars, outside
bars, price rejection bars, railway tracks, etc.), MACD negative
or positive divergence to price action, trend line breakouts,
etc.
How “often” should I
trade? Market conditions will dictate your trading
activity on any given day. The average small-to-medium trader
could conceivably trade up to 10 times a day. However, because
there are no commissions when you trade currencies on the Forex,
you can take long or short positions as often as you like, without
worrying about excessive transaction costs.
How “long” should I
maintain my positions? In general terms, you will
keep your position on until, 1.) you realize sufficient profit
from your position; 2.) your stop-loss is triggered; or, 3.) another
position with greater potential comes up, and you need to free
up funds from another trade to take advantage of it.
I like what I hear and see so far
about foreign exchange trading, but I am still “nervous”
about getting involved. How can I “overcome my fears?”
There is no better way for you to get practical
experience in this market than for you to open a demo account
with a market maker broker that we would recommend to you. That
way, you will get a feel for what it’s like to trade the
Forex market, without actually risking any of your hard-earned
capital.
What is the “spot rate,”
and what is the “spot market?” What “exchange”
does it trade on? In your daily newspaper, you will
find quotations for the forward rate, options, and the spot rate
on currencies. The spot rate means that currencies can be exchanged
for delivery in two days – i.e., on the spot. The word market
is misleading, in that there is no central location where trading
currencies takes place. The bulk of Forex trading is conducted
between approximately 300 large international banks, which process
transactions for large companies and governments. These institutions
continuously provide prices for each other, and their corporate
and institutional clients. Forex trading is not bound to any one
trading floor, but takes place electronically within a network
of banks continuously over a 24-hour period.
What do the terms “bid/ask”
and “spread” mean? Bid is the highest
price that the seller is offering for a particular currency at
the moment; ask is the lowest price acceptable to the buyer. Together,
the two prices constitute a quotation; the difference between
the two is called the spread.
What is “price shifting?”
Price-shifting is the practice of offering a client
a buy or sell price that does not reflect where the market is
actually trading. The shift is always to the advantage of the
broker, and the purpose is obvious. The practice is common and,
unfortunately, legal.
